What Is an Electronic Contract?

Understanding what an electronic contract is is essential to your business’ success in an increasingly digital world. An electronic contract is an agreement that is drafted, negotiated, and executed completely online. Electronic contracts can eliminate many costs associated with traditional pen-and-paper contracts and have countless other advantages. 

As electronic contracts become more popular, your business must understand how to make them enforceable and binding. Federal law like the ESIGN Act makes digital contracts just as binding as traditional contracts, but it requires proper tracking and record-keeping. With effective contract management, you can learn how to create and manage electronic contracts to streamline your processes and reduce costs.

An electronic contract is an agreement formulated online. The parties interact with one another in a digital format, rather than in-person or over the phone. Although it is digital, an e-contract is still a contract. It is an agreement between two individuals or companies to create a binding mutual obligation that must include certain essential elements to be enforceable:

• Offer: A specific offer from one party to the other to perform some service or pay for some good.
• Acceptance: An acceptance from the other party agreeing to the terms of the offer.
• Promise: A promise to do the action that has been accepted, such as payment for certain goods.
• Consideration: Something of value given by one party to the other in exchange for goods or services. For example, $5,000 for office supplies.
• Capacity: Whether or not the signers understand the terms being agreed to. 
• Legality: The contract matter itself is legal.

Electronic contracts are held to many of the same standards as traditional contracts. There must be a “meeting of the minds” for the agreement’s essential terms. The contract should clearly outline each party’s responsibilities and dictate the requirements necessary for full compliance.

Many different kinds of electronic contracts are used in business agreements. Well-executed online contracts combine the formality of a traditional contract with the ease of digital acceptance. The specific type of electronic contract your business should use will depend on the scenarios in which you’ll have to present agreements. The following are a few of the most common types of electronic contracts:

• Browsewrap agreements:  Browsewrap agreements are mobile app or website notices. They state that the user agrees to be bound by the terms and conditions of the agreement simply by using the app or website. This is often presented via a hyperlink on the website for users to click. Browsewrap agreements do not necessarily require another step to “assent” to the agreement.
• Clickwrap agreements: A  clickwrap agreement requires a user to click “I accept” to be bound to the electronic contract. This demonstrates that the user explicitly assents to the agreement rather than an implicit agreement through a browsewrap.
• Scrollwrap agreements: Scrollwrap agreements take clickwrap agreements another step further. They require the consumer to scroll all the way through the terms and conditions before they can click the clickwrap.
• Sign-in wrap agreements: A  sign-in wrap agreement collects acceptance at the same time a user signs in to use a product or service online. 
• Electronic signatures: Any means of proffering a signature digitally. That often means squiggly lines, but can also be as simple as the click of a button or checking of a box

Each type of contract may be appropriate in different situations. For example, clickwraps are best used for high-volume, low-value agreements like Terms and Conditions, privacy policies, and EULA’s. In every case, effective contract management software can help maintain records and ensure the enforceability of electronic agreements.

Yes, electronic contracts are legally binding. Thanks to the Electronic Signatures in the Global and International Commerce Act (ESIGN Act) and the Uniform Electronic Transactions Act (UETA), they are just as enforceable as traditional pen-and-paper contracts. Both acts stipulate that e-Signatures are valid, just like their traditional paper counterparts.

The UETA specifically holds that clickwraps and other “standard webpage click-through process” agreements are valid. When clickwraps meet the requirements of the law and  best practices, users have notice of the terms and conditions and give affirmative assent. When this is the case, courts will enforce electronic contracts—including clickwraps.

Other forms of electronic contracts, like browsewrap and sign-in wrap agreements, tend to have low enforceability. These agreements typically fail because the court finds that users were not aware of what they agreed to. These agreements typically don’t require the user’s affirmative assent to the terms, creating an ambiguous situation that courts do not like. Sign-in wraps are sometimes deemed unenforceable, as courts have held they use a “dual-purpose” button and don’t clearly demonstrate that the user agreed to be bound to the terms. 

Before choosing a signature method for your electronic contracts, you should know your different options. Some options are less efficient than others, and this list reflects the best options near the bottom.

• Pen and Email: Companies still accept contracts online by signing a hard paper copy, scanning, and emailing it. This isn’t digital contracting, but it is still a method utilized by many companies. It is inefficient and will make executing, managing, and tracking signed agreements challenging.
• Digital Signature Pads: A digital signature pad uses an electronic pen to sign, much like signing a traditional signature. However, it requires having special equipment and is not much more efficient than traditional pen-to-paper contracts.
• Electronic Signatures: Modern technology allows for truly digital signatures. Many of these require special sign-in procedures and authentication of a passcode. Some simply allow users to type their names into an appropriate field to “sign” the document.
• Clickwrap: By far, the most efficient solution is the clickwrap agreement. This type of contract allows a user to click a button, check a box, or hit “I agree.” Sophisticated versions track who agreed, when, and what version of the contract was signed.
• Embedded signing: You can embed legally enforceable contracts into different transaction points. Embedded signatures let you customize contract language and fields while integrating data back into your own internal systems.

While there are many different methods you can use on your contracts, effective contract management software can help you choose the right option for you.

Traditional contracts must be edited each time if there is even a single change. In many transactions, only the party names and other similar information needs to change, not the body of the contract. 

A traditional contract must still be manually modified. E-contracts allow autofill information and customizable templates to adjust this basic information without manually altering a paper document. The rest of the contract can be easily modified as well to fit the needs of the current deal.

Ease of use

Electronic contracts are significantly easier to use. Not only are they modifiable, but they are also more accessible. Digital agreements can be stored in a  dynamic repository, making them easy to find and utilize. Contracts kept in the repository can be automatically analyzed for their data and metrics to assess business contracting across the board.

Low transaction cost

Electronic contracts offer a lower overall cost per transaction. This is especially true in high-volume agreements, like Terms and Conditions changes. A sophisticated clickwrap agreement, for example, can automatically require acceptance of the new terms from all relevant parties. It will then record important information without the need for expensive employee time. It also saves money on paper, ink, and other costs associated with traditional contracts.

Saves time

Traditional contracts require cumbersome redlining and going back and forth on emails. It may even require a physical meeting to sign the document or hash out the remaining details. Electronic contracts can be handled online without the need to meet in person.

Contract management is the process of handling agreements with vendors, employees, partners, or customers.

Contracts are at the core of your company and require appropriate management. Out-of-date contract management methods can slow your company down and lead to costly errors. Effective contract management lets you control your agreements at every stage of the process:

• Generate: Manage drafting contracts and easily handle requests. You can create  easy-to-use workflows customized to your contract process.
• Negotiate: Communicate easily with contracting parties within a single platform. The  Ironclad Editor lets you work collaboratively in one system, rather than redlining through emails.
• Approve: Run the contract by stakeholders and get approval within a single platform.
• Accept: Decide how the contract will be signed, and all parties can sign digitally.
• Fulfill: Once the contract is approved, you can meet important deadlines, account for renewals, and meet other obligations.
• Analyze: Contract management lets you analyze your contract after the deal has concluded. Useful metadata can inform business and contracting decisions for the future.
• Optimize: Analyzed data can be used to automate processes, improve business operations, and find growth opportunities.
• Renew: You can create alerts to stay on top of renewal dates. Contract management software also gives you the data to know whether you want to renew based on your business performance.

Electronic contracts are more popular than ever before. The business world is increasingly digital, especially in the post-Covid era.  Learn more about how to manage your electronic contracts here.

Electronic contracts offer many advantages, including the ability to easily modify, manage, and store them. You can create and manage electronic agreements that fit your company’s needs.

Ironclad will streamline your company’s electronic contract process throughout all stages of the contract management lifecycle.  Request a demo to start streamlining your contract management processes.